Looking at the stocks for BHP it shows a Div yield of 11.23%.

This seems quite appealing to me, despite the fact that the price is going down simply because of the huge interest I would get on my investment. I am wondering why it would not be a good investment if I'll be getting 11% each year. If I invest $1k into it will I be getting $110 after the first year even if the price goes down? Or is it based as a percentage of what the current price is? So if my $1k shares is now worth $100 would I only get $11?

Are there other reasons why I should/should not invest in a high div yield stock?

  • @JBKing do you mean to say if they default? – Aequitas Jan 27 '16 at 21:36
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    It's not a matter of "default", since a dividend isn't a debt the company is obligated to pay. They could simply decide to stop paying it. – BrenBarn Jan 27 '16 at 21:37
  • @BrenBarn does that happen often? they simply decide to no longer pay dividends? If the stock was going down and they decided to stop paying dividends I'd likely be holding worthless stock right? – Aequitas Jan 27 '16 at 21:39
  • Not that often though some companies can have tough times and may cut what they pay out to shareholders rather than acquire additional debt to make that payment. – JB King Jan 27 '16 at 21:49
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    If your investment fell from $1000 to $100 and the dividend paid remained the same ($110) then you would still get $110 in dividends (110% yield on the new price but still 11% for price you bought at). However, if the price dropped another 90% from its currently already low price, I doubt you would get any dividend at all. So you could say goodbye to your expected dividend and goodbye to most of your capital. – Victor Jan 28 '16 at 2:14

You should not buy soley for the dividend. The price of BHP is going down for a reason. If you hold until the full years dividend is paid you will make 11% (which is $110 if you bought $1000 worth of shares), but if the share price keeps dropping, you might lose 50% on the stock. So you make $110 on dividends but lose $500 on stock price drop. A perfect way to lose money.

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    How do you know it's "going down for a reason" that makes sense? You can't just assume this without doing further investigation. If it was always safe to make this assumption, the whole idea of value investing wouldn't exist. – davmp Jan 28 '16 at 0:01
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    BHP is a resource/mining company, China's slowdown causing the resources price drops is the main fundamental reason BHP has not seen a bottom yet. Also, BHP is currently downtrending, and a stock which is downtrending is more likely to keep downtrending than start uptrending. Be aware of bear rallies, they are a sure way for value investors to loose money. Value investing by the way, is very biased and subjective, which is why different analysts have different values for the same company; it is very dependent on the assumptions one makes. – user9822 Jan 28 '16 at 1:34
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    @davmp, my statement is not unsupported opinion nor subjective, it is based on technical analysis. The definition of a downtrend is lower lows and lower highs on the price chart. Until there is either a higher low followed by a higher high or a higher high followed by a higher low, the downtrend is still in action and it is most likely that the low has not been reached yet. – user9822 Jan 28 '16 at 11:21
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    @davmp, yes you should be sorry. Maybe you should look up the definition of an uptrend and a downtrend. As I explained earlier a downtrend is defined as lower lows and lower highs. An uptrend is defined as higher lows and higher highs. There is no subjectivity in these definitions at all. And the price chart of BHP is showing lower lows and lower highs, so its downtrend continues. Fundamentals can be very biased and subjective at times because they make many assumptions, particularly about the future. And by the way BHP's fundamentals aren't that great at the moment as well. – user9822 Jan 28 '16 at 12:19
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    @davmp, the markets will trend whether you like it or not, and that is not subjective. What is subjective and biased is fundamental analysis and guesstimating a company's value. Also, this is not a discussion board on subjectivity, so if you have anything else to say then either go to a discussion board or ask a question. – user9822 Jan 28 '16 at 21:04

There have been many interesting and correct answers but to give a direct answer to your first question, dividend yield is simply dividend over current share price. So, if the share price drops, your dividend yield increases proportionately. Dividend yield is not something one should use as the only source of information of whether a stock is a good/bad buy. It does not show many important factors: the riskiness of the company business, its financial position, profitability, ability to generate cash. Furthermore, dividend yield is just a snapshot of an income gain at a given point in time. It does not mean that this very dividend policy is going to continue in the future (especially not so if the company finances this dividend payments using not its own cash reserves but outside capital by issuing debt securities, which is unsustainable).


IMO, what it seems like you've done is nothing more than having screened out a company worth further investigation.

The next step would be a thorough analysis of the company's past financials and current statements to arrive at your own opinion / forecast of the immediate and far future of the company's prospects. Typically, this is done by looking at the company's regulatory filings, and maybe some additional searching on comparison businesses. There are many sources of instruction for how one might "value" or "analyze" a company, or that provide help on "reading a balance sheet". (This is not an easy skill to learn, but it is one that will prove invaluable over a lifetime of investing.)

It is possible that you'll uncover a deteriorating business where the latest selling, and subsequent drop in price that caused the high yield, is well-deserved. In which case, you know to stay away and move on to the next idea.

On the other hand, you might end up confident that the company is not suffering from a drop in sales, rise in expenses, growing debt payments, loss of "moat", etc. In which case, you've found a great investment candidate. I say candidate because you still may decide this company isn't for you, even if the financials are right, because you might find better opportunities for an equal, or acceptable, return at lower risk while you're researching.

As to the yield being high when there are no problems with the fundamentals of the business, this may simply be because of panic selling during this past few week's downturn, or some other sort of temporary and superficial scare. However, be warned that the masses can remain irrational, and thus the price stay suppressed or even drop further, for longer than you're willing to wait for your ROI. The good news is that in that case, you're being well compensated to wait at a 11+% yield!

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    Unless the dividend get cut or removed completely. – user9822 Jan 29 '16 at 3:15
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    Could happen, but that's what the further research is meant to identify a risk of. Instead of figuring that out though, Mark wants you to be a momentum trader. – davmp Jan 29 '16 at 9:30
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    @davmp - reading Marks comments above he mentions nothing about momentum trading, he just talks about the current trend. Do you actually know the difference? – Victor Jan 29 '16 at 12:23
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    @Victor. Per Investopedia definition (as good as any) at investopedia.com/articles/trading/02/090302.asp, momentum trading is trading the trend -- "traders focus on stocks that are moving significantly in one direction with high volume." Mark does say, in other comments on this question, that the current trend is reason to short BHP and not enter long now, which sounds like the classic definition of momentum trading to me. – davmp Jan 29 '16 at 15:23
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    @davmp - from your link - "Momentum traders may hold their positions for a few minutes, a couple of hours or even the entire length of the trading day, depending on how quickly the stock moves and when it changes direction...The primary technical indicator of interest is the momentum indicator...The momentum line is plotted as a tandem line to the price chart, and it displays a zero axis, with positive values indicating a sustained upward movement and negative values indicating a potentially sustained downward movement." – Victor Jan 29 '16 at 20:15

BHP Billiton has room to answer doubters as commodities rout batters debt notes in part:

There has been speculation that the company could cut its shareholder dividend, while Liberum Capital analyst Richard Knights has suggested BHP might look to raise as much as $US10 billion ($14.3 billion) in new equity capital.

If the dividend is cut, you won't see 11% and the share price may well decline further. There is a possibility of big losses here given the change in the prices of the products the company sells.

To add from another source

The only reason BHP trades on a yield of more than 8% is because the market is pricing in a cut to the dividend. According to consensus earnings estimates for 2016 and 2017, earnings per share will be $0.86 and $1.27 respectively. Dividends per share forecasts are $1.83 and $1.81 respectively.

  • Even if it goes down to 0.86 that's still 5.7% so would it not be a decent investment still? – Aequitas Jan 27 '16 at 22:21
  • If that could be taken without considering the share price, sure. However, what if the share price drops considerably more, the company does a reverse stock split? I can remember the story of Nortel in Canada that went bankrupt years ago. – JB King Jan 27 '16 at 22:27
  • So basically the question is if they'll bounce back or not, and there's not really way of knowing is there? So if I believe that they will continue doing alright then I should invest but if I think they're on the way out I shouldn't. Do you think BHP would make a good investment at this time? – Aequitas Jan 27 '16 at 22:30
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    @davmp - Pros -> 5 buys, 3 sells and whole lot of middle of ground. If these so called pros are all basing their valuations on Fundamental Analysis why is there such differences between their recommendations? – Victor Jan 29 '16 at 12:27
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    @davmp - so your whole answer is based on you doing your own analysis for which you will interpret facts differently from others based on your goals and your view of the stock and the market. If seeing a stock with a dividend yield of 11% and a view that you would really want to buy this stock won't your interpretation of the facts then be leaning towards the buy side, so you will concentrate on most of the information leaning to verify your views and largely ignore those that oppose them. This sounds very subjective to me, something you have been claiming of others. – Victor Jan 29 '16 at 20:07

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